Thursday, July 24, 2008

Unemployment in Spain, which was the source of half the eurozone's new jobs between 2001 and 2006, was up sharply in the second quarter as the credit crunch in the financial sector gradually extended its reach across the whole economy.

Spain's unemployment rate was up at 10.4 percent (from 9.6 percent in Q1) according to data from the National Statistics Office (INE) this morning. The number of people in employment increased 0.1 percent from the previous quarter and stood at 20.4 million, as compared with a 0.4 percent decline in the first quarter, but we need to consider seasonal factors here, since employment should normally be rising sharply in the second quarter.

The number of jobs in construction fell 4.5 percent to 2.55 million, while manufacturing jobs declined 2.1 percent and agricultural jobs were down 5 percent. Service jobs increased 1.9 percent to 13.81 million.

This data is compiled by the INE on a quarterly basis using a different methodology (survey based) than that used by INEM, which gives the monthly data. At this point it is hard to estimate the actual July increase which we should get to see next week, but it is likely to have been considerable. Meantime here is the last monthly chart based on the INEM data.

Bank Lending To Households and Corporates

Well, I am now going to present two of what I consider to be the most important charts for understanding the mechanics of the current Spanish crisis. The rate of growth in lending to households and the rate of growth in lending to corporates.

We now have the May 2008 data from the Bank of Spain, and as we will see, in each case they continue to slow. But first, why do I say "the most important charts". Well simply because they sum up the core of what the problem is in a very simply nutshell. The Spanish banks are struggling to find liquidity, and as a result they are unable to maintain the pace of lending expansion to individuals and to households that they previously could. This is what is provoking the severity of the problem, and in comparison with this everything else is a mere detail (although of course some of the details will soon be becoming big problems in and of themselves). Basically, as we know, more houses are still being built this year than ever. So construction at this point hasn't slowed that much. The thing is though the builders are accumulating unsold homes (which will soon be passed on to the banks as the builders go bust one by one), since individuals don't have acces to sufficient mortgage finance to buy them.

Thus the rate of new lending to households has been dropping steadily:

And then we see that corporate Spain is having the same problem, which is why so many people are busy out there trying to sell subsidiaries, and such like, since they are having problems borrowing sufficient money, and of course sales and profits are now steadily going down.

Now if we look at the next chart, you will see that Spanish companies and households are much more indebted than their average eurozone neighbours, and companies especially - at around 120% of GDP.

Now you might say, well isn't it a good thing that all this is slowing, since so much lending and debt was hardly healthy? And I would have to agree with you. But nothing is so simple, since after so many years of debt indulgence the economy is badly structurally distorted, and relative prices are way out of line with most competitors, so as domestic consumption drops exports can't take over and down the whole edifice comes.

Those of you who can speak Spanish can probably read Italian too, and I just found this comment from one of the readers of this blog on an Italian financial forum:

I don't know about the idea of hiring people to give economics classes to Zapatero, but if they are looking for someone, this guy gives effectively a master class in one short paragraph. What he is really saying is that the absence of independent monetary policy meant you had no way to stop yourselves going up, you were simply shot out of the cannon, and now you have no way to stop yourselves coming down just as quickly as you went up. I remind everyone: interest rates at the ECB just went up, not down, and deflation - and possibly a very whopping dose - not inflation, is about to become Spain's problem.

Banco Popular Under The Microscope

Today Banco Popular is back in the news again. Banco Popular Espanol is Spain's third-biggest listed bank, and today they reported that second quarter profits rose less than analysts estimated as asset sales offset higher loan defaults. Perhaps the most important piece of information we have learnt today is that the ratio of provisions to defaults has now plunged to 139 percent, down from 185 percent in March and 256 percent a year ago as new defaults have only increased and increased 1.15 billion euros from 359.2 million euros a year ago.

Popular fell as much as 5.4 percent in Madrid trading after reporting net income increased 8.3 percent to 352.2 million euros ($552.5 million) from 325.3 million euros a year earlier. That missed five analysts' 392 million-euro median estimate. Popular may need to raise capital in the not too distant future should loan losses continue to mount. Popular fell 35 cents, or 4.4 percent, to 7.60 euros at 9:30 a.m. in Madrid, which was the most since July 15 and which puts this year's decline to 35 percent after the shares had recovered somewhat in recent days.

In May, the bank reported provisions of 39.3 million euros to cover loans to Inmobiliaria Colonial SA. On July 15, Popular said it set aside 100 million euros to cover loans to Martinsa-Fadesa SA, Spain's first traded developer to seek bankruptcy protection. Popular made 332 million euros in provisions in the quarter. It used gains of 200 million euros from the sale of real estate to cover part of the loan-loss provisions. Popular also booked 40 million euros in gains from the sale of its French banking unit.

Popular reported core capital, a measure of the underlying solvency backing its business, of 6.67 percent in June and said core capital could reach 7 percent by the end of 2008. The bank reported loan losses as a proportion of total loans of 1.42 percent, up from 0.98 percent in March and 0.72 percent a year ago.

Losses from impairment of assets climbed 325 percent to 343.6 million euros from 80.8 million euros a year ago. Lending growth slowed to 8.1 percent from 11.7 percent in March and 16.7 percent in the same period last year. Client funds Net interest income rose 8.8 percent to 630.97 million euros.